Gold Market Update

Gold has done little price-wise since the last update - it has continued to
track sideways unwinding the overbought condition that developed as a result
of the breakout in September. At first sight this trading range looks like
a period of consolidation that should be followed by renewed advance, but with
regard to the short-term outlook, there are several reasons for some caution
at this time.

On the 1-year chart we can see that the trading range following the September
rally is starting to look like a small Head-and-Shoulders top. Given the support
that now exists at the top of the 9-month trading range that preceded the breakout,
we would not normally take this apparent Head-and-Shoulders top seriously,
but there are several important factors that we will come to shortly which
are signalling that the danger of a breakdown from this pattern and consequent
short-term retreat should not be underestimated. But before leaving the 1-year
chart, there are several other technical points that are worthy of note. The
first is that there is a clear support level at $460 and the fact that the
50-day moving average is now approaching this level is an indication that the
chances of a breakout from the trading range, one way or the other, are now
increasing rapidly. Normally in this situation, following the strong September
breakout, the approach of this average would lead to an upside breakout, but
the adverse factors already alluded to, couple with the increasingly large
gap between the 50 and 200-day moving averages, mean that the risk of a downside
break and retreat back towards the 200-day moving average cannot be ignored.

The biggest factor threatening a short-term downside break is the dollar,
which is looking strong and is in position to take out important resistance
in the 90.5 - 92 area on the index. On the 5-year dollar index chart, we can
see that the moving averages have swung into bullish alignment, increasing
the chances of the dollar breaking above the clear resistance level shown.
This is an important juncture for the dollar as if it doesn't overcome this
resistance level soon, it is likely to enter another period of decline.

Another factor that increases the chances of gold breaking down short-term
is the non-confirmation of gold's breakout by the gold stock indices, which
have refused to break out to new high, despite gold's clear breakout.

We will finish by considering the long-term 5-year chart for gold, in order
to put any near-term breakdown from the recent trading range into perspective.
As should be clear from a glance at the 5-year chart, a breakdown from this
trading range, which would be signalled by a breakdown below $460, would not
be a seriously bearish development for gold, as the price can afford to drop
back into the $440 area without the larger pattern suffering any real technical
damage - on the contrary, this would set it up for another run and would doubtless
throw up another buying opportunity in gold stocks, with the HUI index probably
retreating back towards the lower boundary of the large trading range, looked
at in some detail in the last Marketwatch. If this happens, it will be time
to buy with relatively close stops beneath the nearby strong support.

The above represents the opinion and analysis of Mr. Maund,
based on data available to him, at the time of writing. Mr. Maunds opinions
are his own, and are not a recommendation or an offer to buy or sell securities.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation
of any kind from any groups, individuals or corporations mentioned in his reports.
As trading and investing in any financial markets may involve serious risk
of loss, Mr. Maund recommends that you consult with a qualified investment
advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction
and do your own due diligence and research when making any kind of a transaction
with financial ramifications.